Obama brawl with Congress looms as investors unalarmed

Fresh from a budget fight so raw that the Republican speaker of the U.S. House cursed the Democratic leader of the Senate outside the Oval Office, President Barack Obama and Congress are heading for an even bigger confrontation over raising the nation’s debt limit.

U.S. Treasury bond investors -- who most directly bear the risk of a government default -- aren’t alarmed. In a sign of the disconnect between Washington and Wall Street, investors remain confident the two sides will compromise rather than inflict what Obama called “catastrophic” consequences. Yields on long-term U.S. debt are near record lows.

“It’s ugly in Washington, and getting uglier,” said Matthew Duch, a fund manager in Bethesda, Maryland, for Calvert Investments, which oversees more than $12 billion in assets. “But that is just resulting in even lower rates as the market is much more concerned about growth than if the U.S. will be able to pay their bills.”

That hasn’t stopped Republicans and the president from moving toward a clash, with House leaders vowing to exact deep spending cuts in exchange for raising the borrowing ceiling and Obama saying he won’t negotiate on the debt. The U.S. Treasury is bumping up against its legal borrowing limit.

“Heretofore, they’ve been playing with a cherry bomb in economic terms,” said Steve Bell, a former Republican Senate budget aide. “When they start playing with the debt ceiling in February, they are starting to play with C-4,” he said, referring to the powerful plastic explosive material.

Investors Unrattled

When partisan gridlock last brought the government to the brink of default in August 2011, the stock market fell and Standard & Poor’s cut the nation’s credit rating. After House Speaker John Boehner, an Ohio Republican, withdrew from negotiations on July 22, 2011, the S&P 500 Stock Index fell more than 16 percent in the next 11 trading days.

Bond investors were unrattled. Yields on 10-year U.S. Treasury notes declined from 2.96 percent on July 22 to 2.56 percent on Aug. 5, 2011, the day of the S&P downgrade. Yields continued to drop, reaching 1.72 percent on Sept. 22 of that year.

Ten-year note yields rose two basis points, or 0.02 percentage point, to 1.93 percent at 10:11 a.m. New York time, according to Bloomberg Bond Trader data, after the Labor Department reported the U.S. added 155,000 jobs last month and the unemployment rate held at 7.8 percent.

“The market is not worried about default,” said Zach Pandl, an interest-rate strategist in Minneapolis at Columbia Management Investment Advisers LLC, which oversees $340 billion.

“In the U.S., the debt level is lower than comparable countries, growth is higher and we have a unblemished track record in the U.S. of debt repayment, all of which has helped calm investor concerns,” he said. “The process is messy, but the outcome is always acceptable.”